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China has cornered the rare earth metals market and the critical link they provide to the development of ‘green’ technologies and hi-tech weapons systems

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Would-be North American producers of rare earth minerals might be in competition for the same slice of market share, but that doesn't keep them from agreeing on one thing the development of new rare earth projects, while challenging, is not optional.

China supplies as much as 97 percent of rare earths, a complex of 17 elements vital to the advancement of green technologies and high-technology weapon systems. It has been able to provide an adequate supply of rare earths for export, but with the emerging nation's internal demand on the rise, market sources say the need to develop non-Chinese projects is stronger than ever.

"I don't think there's going to be a 'trade war,' but what you're going to find is China's internal demand is increasing and they will take care of their demand first. It's not like they're out to hurt someone else, but they have their own demand," said Ian London, vice president of market development and energy advisor at Toronto-based exploration company Avalon Rare Metals Inc., which hopes to bring its Nechalacho project in the Northwest Territories online by the second half of 2014. "Under those realities of them building their own economy, it falls on suppliers in other parts of the world to develop their own strategies," he said.

Edward F. Cowle, chief executive officer of Salt Lake City, Utah-based exploration venture U.S. Rare Earths Inc., agreed that securing a Western supply of rare earth minerals should be an international priority despite assertions from some analysts that the concern has been overblown.

"Some experts say that there is no crisis, that it's overblown, that by 2015 supply and demand will match. But what if there is a crisis from China? Do you really want your weapon systems in this country dependent on China? If there is a domestic supply and it's accessible and it's minable and it's near roads, power and water, it just makes sense to me to have it," Cowle said. His company owns rights to the yet-undeveloped Diamond Creek and Lemhi Pass properties in Idaho and Montana.

The solution can't be on a nation-by-nation basis, but must be on a global scale if the Western World hopes to keep up with the Chinese, sources said.

"I've never taken the position that it should be U.S. only or North American only. What we need is a worldwide solution," Mark A. Smith, chief executive officer of rare earths producer Molycorp Minerals LLC.

"We don't believe it's a U.S. vs. Canadian vs. Mexican vs. European issue," London agreed. "We have to get the rest of the world's technologies moving."

While potential producers agree that a Western rare earths solution is necessary, a number of stumbling blocks still stand between miners and the ore, not the least of which is project financing.

Greenwood Village, Colo.-based Molycorp, considered the furthest along in terms of U.S. rare earth projects, boasts a 2012 estimated start date for its Mountain Pass project in California, but it is short on capital, Smith told a U.S. House of Representatives Science and Technology subcommittee in mid-March.

Just days after testifying, Rep. Mike Coffman (R., Colo.) introduced a bill that includes a loan-guarantee program for U.S. rare earth producers—but until such a bill is signed into law, financing could be difficult for domestic producers.

"Certainly the financing is just something that we'll have to go through," Smith told AMM, noting that a government-backed loan-guarantee program would be a "very attractive" option.

At presstime, Molycorp filed a registration statement with the U.S. Securities and Exchange Commission, outlining plans to raise $350 million. Additional funding will be required, the company told AMM.

Cowle agreed that the government could be a logical solution to the rare earths financing difficulties. "You're not going to be profitable for a long time because you're going to need an awful lot of money to get started. Who has the pockets to do that? Obviously, the federal government," he said.

But as the buzz around rare earths grows louder, more and more investors also are taking a closer look.

"We're looking at proposals," Cowle said, noting that U.S. Rare Earths is likely to sell offtake to raise money even before production begins. "I would like to end up selling production or offtakes before we actually start producing realistically. It may not be the end-users, the big corporations; it may be financial institutions."

Financing also could come from rare earth funds, at least two of which are already in the works Saint-Cergue, Switzerland-based Dolefin SA's REE Fund, which intends to invest in global rare earth companies; and Toronto-based Dacha Capital Inc., which plans to provide investors access to physically stockpiled material.

"We don't have all the financing lined up, but we don't have a great concern over that," London said. "This is all part of the whole green economy and new economy (movement), so it has a broader appeal."

But even with funding in place, the lack of a specialized work force also is a challenge for would-be producers. North America has seen an exodus to China of technical experts in rare earths, and without the country investing in training for the next generation of workers the skilled labor supply is fast approaching zero, producer sources said.

"We have no curriculum in this country that focuses on rare earths processing and technologies whatsoever," Smith said. "What we have to do is hire people with no experience, bring them to our facility and then train them in all of these different processing techniques. This has worked out very well so far, but the employment side of this is going to ramp up quite significantly as early as later this year, and that's when it will start to become more of an issue."

If the U.S. is successful in implementing a full mining-to-magnets strategy—that is, shifting an entire supply chain ability stateside—some 900 new high-skilled jobs will be created, Smith said.

London agreed that the work force issue is a big challenge, noting that Avalon has hired workers with general mining competency and fine-tuned their skills on-site to match the needs of the rare earths sector.

But financing and labor aside, the biggest deterrent to Western rare earths production is time, sources said. By some estimates, it takes at least a decade before a new discovery can start to produce, and even the most advanced projects in the pipeline are still some 24 months away.

"Since bringing a mine on-stream takes from seven to 10 years on average, then I believe there definitely should be cause for concern," said Gary L. Billingsley, executive chairman of Great Western Minerals Group Ltd., Saskatoon, Saskatchewan. "We identified a potential crisis over 10 years ago when we first looked at rare earths but nobody seemed concerned until very recently, and unless rare earth sources are developed very quickly outside China there could be a crisis."

The two Great Western projects closest to development—the Steenkampskraal Mine in South Africa and the Hoidas Lake rare earths deposit in Saskatchewan—are due to come online in 2012 and 2014, respectively, he said.

Cowle, whose company's nearest-term project is still some six to seven years away from production, said some projects might move along faster due to a recently heightened awareness in Washington. "With this national crisis, maybe some of the red tape could be cut, but to get a mining operation up and pulling rare earths out of the ground and processing is a long process," he said. ANNE RILEY

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